Calgary, Alberta (March 18, 2021) TSX: SHLE
Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three and twelve months ended December 31, 2020.
2020 HIGHLIGHTS
2020 was a year of unprecedented challenges, as the oil and gas industry reeled from a significant reduction in global demand caused by the coronavirus pandemic (“COVID-19”) and the fallout from a price war between the Organization of Petroleum Exporting Countries (“OPEC”) and other oil exporting nations. While this was a challenging business environment, Source demonstrated the strength of its business model and its ability to adapt to the rapid swings in activity levels seen during the year. Some of the key achievements realized for the year were:
- realized sand sales volumes of 1,968,511 metric tonnes (“MT”), a decrease of 12% from 2019, and sand revenue of $210.0 million;
- distributed 2,021,335 MT of sand through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network;
- realized gross margin of $24.7 million and Adjusted Gross Margin(1) of $56.8 million;
- implemented and maintained cost control measures that resulted in a 34% reduction of operating and general and administrative expense when compared to 2019;
- renegotiated the majority of Source’s rail car lease contracts, resulting in a reduction in 2020 lease payments of approximately $9.0 million, compared to 2019, and a reduction to Source’s total outstanding lease obligations;
- incurred capital costs of $3.7 million which was an 81% reduction from amounts spent in the prior year;
realized Adjusted EBITDA(1) of $37.7 million; and - reported net loss for the year ended December 31, 2020 of $185.5 million, or $36.81 per share, which included an impairment loss of $143.7 million recognized in the year.
FOURTH QUARTER HIGHLIGHTS
In the fourth quarter, completion activities in the WCSB continued to gain momentum driven by an increasingly positive outlook for commodities. As experienced in previous quarters, Source’s customers continue to demand larger volumes of sand in progressively shorter periods of time. Some of Source’s fourth quarter accomplishments include:
- completed a Recapitalization Transaction (as defined below), resulting in reduced debt, enhanced liquidity and increased financial flexibility, enabling Source to withstand industry volatility while continuing to build on its position as the largest frac sand provider in the WCSB;
- realized sand sales volumes of 474,345 metric tonnes (“MT”) and sand revenue of $48.9 million;
- achieved a new service record in December for the amount of sand delivered through Sahara to the blender in a single day of 4,436 MT;
- renewed a sales contract for an additional three-year term and achieved a new direct sale customer contract for a one-year term;
- forward placed 300,000 MT of inventory in the WCSB in order to ensure service quality in the first quarter of 2021; and
- realized Adjusted EBITDA(1) of $12.2 million, an increase of $3.0 million, or 32% when compared to the fourth quarter of 2019.
Note:
(1) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below.
RESULTS OVERVIEW
| Three months ended December 31, | Year ended December 31, |
| ($000’s, except MT and per unit amounts) | 2020 | 2019 | 2020 | 2019 |
| Sand volumes (MT)(1) | 474,345 | | 479,017 | | 1,968,511 | | 2,233,034 | |
| | | | |
| Sand revenue | 48,936 | | 58,401 | | 210,021 | | 281,866 | |
| Wellsite solutions | 9,582 | | 9,235 | | 36,644 | | 46,208 | |
| Terminal services | 451 | | 1,006 | | 3,213 | | 4,882 | |
| Sales | 58,969 | | 68,642 | | 249,878 | | 332,956 | |
| Cost of sales | 42,650 | | 51,669 | | 193,033 | | 253,302 | |
| Cost of sales – depreciation | 5,253 | | 6,351 | | 32,188 | | 42,043 | |
| Cost of sales | 47,903 | | 58,020 | | 225,221 | | 295,345 | |
| Gross margin | 11,066 | | 10,622 | | 24,657 | | 37,611 | |
| Operating expenses | 3,198 | | 5,423 | | 12,485 | | 20,710 | |
| General & administrative expense | 1,203 | | 2,712 | | 9,379 | | 12,247 | |
| Depreciation | 2,647 | | 4,020 | | 13,860 | | 16,212 | |
| Income (loss) from operations | 4,018 | | (1,533) | | (11,067) | | (11,558) | |
| Total other expense (income) | (19,997) | | 670 | | 143,049 | | 102,338 | |
| Income (loss) before income taxes | 24,015 | | (2,203) | | (154,116) | | (113,896) | |
| Deferred income tax expense (recovery) | — | | 416 | | 31,350 | | (23,941) | |
| Net income loss(2) | 24,015 | | (2,619) | | (185,466) | | (89,955) | |
| Net earnings (loss) per share ($/share)(3) | 4.58 | | (0.58) | | (36.81) | | (17.68) | |
| Diluted net earnings (loss) per share ($/share)(3) | 4.58 | | (0.58) | | (36.81) | | (17.68) | |
| Adjusted EBITDA(4) | 12,161 | | 9,184 | | 37,721 | | 48,626 | |
| Sand revenue sales/MT | 103.17 | | 121.92 | | 106.69 | | 126.23 | |
| Gross margin/MT | 23.33 | | 22.17 | | 12.53 | | 16.84 | |
| Adjusted Gross Margin(4) | 16,319 | | 16,973 | | 56,845 | | 79,654 | |
| Adjusted Gross Margin/MT(4) | 34.40 | | 35.43 | | 28.88 | | 35.67 | |
Notes:
(1) One MT is approximately equal to 1.102 short tons.
(2) The average Canadian to US dollar exchange rate for the three and twelve months ended December 31, 2020 was $0.7675 and $0.7454, respectively (2019 – $0.7576 and $0.7536, respectively).
(3) Prior year amounts have been restated to reflect the 12:1 share consolidation pursuant to the Recapitalization Transaction.
(4) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below.
Q4 2020 RESULTS
Activity levels in the WCSB partially recovered through the third and fourth quarters, a result of improved commodity prices. Customers took advantage of stabilized commodity pricing by deploying capital in advance of the end of the year resulting in fourth quarter sand volumes that were relatively consistent with 2019. Sand revenue was $48.9 million for the quarter, a decrease of $9.5 million from the fourth quarter of 2019 due to continued pricing pressure in the WCSB.
Wellsite solutions revenue was $9.6 million for the fourth quarter, an increase of 4%, resulting from increased sand volumes trucked to wellsites compared to the fourth quarter of 2019.
Cost of sales, excluding depreciation, was favorably impacted by cost savings initiatives, warmer weather and production efficiencies implemented last year and further entrenched in 2020. Proceeds of $0.4 million from the Canadian Emergency Wage Subsidy (“CEWS”) program further contributed to the lower cost of sales reported for the quarter.
Gross margin and Adjusted Gross Margin increased by $0.4 million and decreased by $0.7 million, respectively, for the fourth quarter compared to 2019, as lower average realized sand prices for the quarter were mitigated by the operational efficiencies achieved. Gross margin was favorably impacted by lower cost of sales – depreciation, due to a lower equipment asset base resulting from impairment recognized early in 2020 and the benefits of the rail car lease negotiations.
Compared to 2019, operating and general and administrative expenses were lower by $3.7 million, or 46%, for the fourth quarter. Workforce optimization efforts implemented in 2019 as well as cost control measures undertaken in 2020, as discussed below, drove further reductions in costs, including lower variable incentive compensation. Operating and general and administrative expenses were also favorably impacted by the receipt of proceeds from the CEWS program of $0.3 million in the fourth quarter.
For the three months ended December 31, 2020, Adjusted EBITDA was $12.2 million, an increase of $3.0 million from 2019, as the lower average sales price for sand was more than offset by a continued focus on cost controls across the organization.
RECAPITALIZATION TRANSACTION
In light of the events of 2020, the Company, under the supervision of a committee comprised of independent members of its board of directors (the “Board”), undertook a comprehensive process to evaluate all reasonably available alternatives to access additional liquidity and improve the Company’s capital structure. On December 30, 2020 Source announced the completion of its recapitalization transaction (the “Recapitalization Transaction”), designed to provide the Company with a stronger long-term capital structure and enhanced liquidity and financial flexibility. The transaction was undertaken through a plan of arrangement under the Canada Business Corporations Act and achieved the following:
- addressed the maturity and obligations (including all accrued and unpaid interest) under the $157.7 million senior secured notes due 2021 (the “Old Notes”) through an exchange of the Old Notes for a combination of new senior secured first lien notes due March 15, 2025 (the “Notes”), resulting in a $32.7 million decrease of the principal amount and the issuance of new common shares of Source, constituting approximately 62.5% of the common shares outstanding on a fully diluted basis;
- provided enhanced liquidity and financial flexibility as a result of the terms of the Notes, which enable the Company to pay interest in kind, rather than in cash, on the Notes for all quarterly interest payments up to and including February 15, 2022;
- enabled Source to access new funding under a $20.0 million term loan facility from the Company’s existing lending syndicate;
- enabled Source to obtain the support of its lending syndicate through an amendment to Source’s revolving Credit Facility (as defined below) providing the Company with an extended maturity date, ongoing financial flexibility and access to liquidity under the amended Credit Facility; and
- resulted in existing shareholders retaining approximately 37.5% of the outstanding common shares on a fully diluted basis following completion of the Recapitalization Transaction, thereby allowing shareholders to participate in the anticipated future growth of Source’s business as market conditions improve in the WCSB.
Immediately prior to the closing of the Recapitalization Transaction, the outstanding common shares of Source were consolidated on a twelve-for-one basis. The Recapitalization Transaction resulted in a gain on the extinguishment of debt, comprised of the difference between the carrying value of the Old Notes and the Notes, offset in part by the fair value of the equity issuance and net of transaction costs recognized. Refer to Note 13 of the audited consolidated financial statements for the year ended December 31, 2020 for additional detail related to the Recapitalization Transaction.
As activity levels began to recover in the latter half of the year, Source has continued to examine its operational costs while accommodating increased demand to ensure it remains focused on maximizing operational efficiencies. Source also worked closely with certain rail car lease vendors to negotiate more favorable long-term contracts, resulting in the execution of amended rail car lease contracts which significantly reduced ongoing monthly lease payments and lowered Source’s long-term obligations for these leases.
LIQUIDITY AND CAPITAL RESOURCES
As noted above, Source completed the Recapitalization Transaction and renegotiated lease terms providing Source with a stronger, more flexible, long-term capital structure. The Company now has a banking operating facility, comprised of an asset backed loan facility (“ABL”), a standby letter of credit facility and a senior secured term loan (collectively, the “Credit Facility”). As of December 31, 2020, Source had $3.7 million drawn under its ABL. The Credit Facility was also being used to support $14.6 million of letters of credit leaving $17.3 million of available liquidity. Source is subject to externally imposed capital requirements for the Credit Facility. As of December 31, 2020, Source Energy Services and its subsidiaries were compliant with all covenants of the Credit Facility.
| Capital expenditures | Three months ended December 31, | Year ended December 31, |
| ($000’s, except MT and per unit amounts) | 2020 | 2019 | 2020 | 2019 |
| Terminal expansion | — | | (5,788) | | 43 | | 4,272 | |
| Wellsite solutions | 943 | | 293 | | 1,613 | | 5,115 | |
| Production expansion | 58 | | 784 | | 582 | | 6,561 | |
| Overburden removal | 137 | | 779 | | 1,341 | | 3,672 | |
| Other | — | | 23 | | 104 | | 49 | |
| Capital expenditures | 1,138 | | (3,909) | | 3,683 | | 19,669 | |
Capital expenditures for the fourth quarter of 2020 were $1.1 million, a change of $5.0 million from the same period last year. In the fourth quarter of 2019, Source received insurance proceeds of $5.9 million related to amounts previously expended for the Fox Creek terminal expansion project. For the year ended December 31, 2020, capital expenditures were $16.0 million lower than the prior year due to the completion of the Fox Creek terminal expansion and two Sahara units in 2019.
Source believes its previous investment in processing assets and logistics infrastructure will allow for modest capital expenditures through 2021 and beyond even as industry activity returns to more normalized levels.
BUSINESS OUTLOOK
Source’s activity levels recovered in the latter half of 2020 and have continued to gain momentum into the first quarter of 2021, supported by the strength of commodity prices. Commodity prices stabilized at the end of 2020 and have demonstrated continued strength early in 2021, allowing exploration and production (“E&P”) companies to generate stronger cash flows. Source’s customers continue to be focused on strengthening their balance sheets; however, Source is starting to see more customers developing drilling and completion programs for the second half of 2021 and into 2022.
Source continues to remain optimistic about the longer-term industry prospects, including increased demand for WCSB natural gas driven by LNG, coal to natural gas power generation conversions and increased gas pipeline capacity. In addition, expansion of oil pipeline egress capacity and the potential for additional hydrocarbon shipments by rail continue to support the Company’s expectation that activity levels should steadily increase in the coming years.
Source continues to see E&P companies drive additional efficiencies in their completion programs by completing fracs over much shorter periods of time, requiring larger volumes of frac sand. Source’s terminal network and logistics capabilities have become a key component in the success of these accelerated frac programs in the Montney and the Duverney, and Source’s success in capturing a large portion of this market is further enhanced by the delivery capability of the Sahara units. Source is ideally positioned to serve the increase in demand for frac sand and logistics services as activity levels rebound.
Source continues to focus on improving logistics for other items needed at the wellsite, in response to customer requests to expand its service offerings, and continues to develop opportunities to further utilize its existing Western Canadian terminals to provide additional diversification of its business. Over the longer-term, Source anticipates that these new terminal services will be a meaningful part of its business.
Source cannot predict the extent of the impact COVID-19 or its variants may have on energy demand, or how OPEC will react to those changes in demand and how those events could impact the Company’s operations. Source cannot reasonably estimate the period of time that adverse business conditions will persist, the impact they will have on the Company’s business, liquidity, consolidated results of operations and consolidated financial condition, or the pace of any subsequent recovery.
COVID-19
In March 2020, COVID-19 was declared a global pandemic by the World Health Organization. Measures enacted to prevent the spread of the virus resulted in global business disruption with significant economic repercussions. With the onset of COVID-19, Source took immediate steps to ensure the safety of its employees, contractors and customers and implemented a COVID-19 program. Office employees were moved to a work-from-home model and special protocols were put in place to minimize COVID-19 exposure for employees and contractors in the field and at the production plants.
As a result of the weakening economic climate and the decline in the demand for crude oil, Source implemented operational cost reductions and other measures which included the following:
- reduced staff levels and hours of operations;
- reduced Board, executive and salaried employee compensation and benefits;
- eliminated all discretionary expenditures;
- reduced capital expenditures;
- received proceeds from the US Small Business Administration’s Paycheck Protection Program;
- received proceeds from the CEWS program; and
- completed the Recapitalization Transaction (as outlined above).
The Company also carried out an assessment of the recoverable value of its operations as a result of the weakened economic climate. A discounted cash flow analysis was completed using an updated weighted average cost of capital and revised forecasts, resulting in an impairment loss of $143.7 million recognized in the first quarter of 2020.
UPDATED NI 43-101 TECHNICAL REPORTS FOR THE MINERAL PROJECTS IN WISCONSIN, UNITED STATES
Source is pleased to announce that it has filed with the applicable Canadian securities regulatory authorities updated National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) technical reports for each of its three mineral projects in Wisconsin, United States (collectively, the “Technical Reports”).
The Technical Reports have each been prepared with an effective date of December 31, 2020 and were updated as part of an annual assessment that accounts for conventional mining depletion of the mineral resources and include updated production records. The updated resources do not represent a 100% or greater change in the total mineral resources.
Mineral resources are not mineral reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the mineral resource will be converted into a mineral reserve. Source has not based its production decisions and ongoing mine production on mineral reserve estimates, preliminary economic assessments, prefeasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any mineral reserves have increased uncertainty and risk of failure.
Further details with respect to the scientific and technical information contained in this press release are available in the Technical Reports, which are available under the Company’s SEDAR profile at www.sedar.com.
ABOUT SOURCE ENERGY SERVICES
Source is a company that focuses on the production and distribution of high quality Northern White frac sand, as well as the distribution of other bulk completion materials not produced by Source. Source provides its customers with an end-to-end solution for frac sand supported by its Wisconsin mines and processing facilities, its Western Canadian terminal network and its “last mile” logistics capabilities. Source also provides storage and logistics services for other bulk oil and gas well completion materials and has developed Sahara, a proprietary wellsite mobile sand storage and handling system.
Source’s full-service approach allows customers to rely on its logistics platform to increase reliability of supply and to ensure the timely delivery of their requirements for frac sand and other bulk completion materials at the wellsite.
IMPORTANT INFORMATION
These results should be read in conjunction with each of Source’s audited consolidated financial statements for the years ended December 31, 2020 and 2019, together with the accompanying notes (the “Financial Statements”) and its corresponding MD&A for such periods. The Financial Statements and MD&A and other information relating to Source, including the Annual Information Form (“AIF”), are available under the Company’s SEDAR profile at www.sedar.com. The Financial Statements and comparative statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Unless otherwise stated, all amounts are expressed in Canadian dollars.
NON-IFRS MEASURES
In this press release Source has used the terms Adjusted Gross Margin and Adjusted EBITDA, including per MT, which do not have standardized meanings prescribed by IFRS and Source’s method of calculating these measures may differ from the method used by other entities and, accordingly, they may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss), gross margin and other measures of financial performance as determined in accordance with IFRS. For additional information regarding non-IFRS measures, including their use to management and investors and reconciliations to measures recognized by IFRS, please refer to the MD&A, which is available online at www.sedar.com and through Source’s website at www.sourceenergyservices.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this press release constitute forward-looking statements relating to, without limitation, expectations, intentions, plans and beliefs, including information as to the future events, results of operations and Source’s future performance (both operational and financial) and business prospects. In certain cases, forward- looking statements can be identified by the use of words such as “expects”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes”, “plans”, “projects” or variations of such words and phrases, or state that certain actions, events or results “may” or “will” be taken, occur or be achieved. Such forward-looking statements reflect Source’s beliefs, estimates and opinions regarding its future growth, results of operations, future performance (both operational and financial), and business prospects and opportunities at the time such statements are made, and Source undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or circumstances should change unless required by applicable law. Forward-looking statements are necessarily based upon a number of estimates and assumptions made by Source that are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Forward-looking statements are not guarantees of future performance. In particular, this press release contains forward-looking statements pertaining, but not limited, to: our continued optimism for longer term industry prospects and increased demand for LNG on WCSB activity levels; anticipated improvements in pipeline egress and transportation capacity, coal to natural gas power generation conversions and the potential for additional hydrocarbon shipments by rail; outlook for operations and sales volumes; expectations respecting future conditions; revenue and profitability; industry activity levels; the impact of COVID-19 on the global economy and the effect it may continue to have on the Company’s business, liquidity, operations and financial condition and the pace of any subsequent recovery; industry conditions pertaining to the frac sand industry; the benefits that Source’s “last mile” services provide to customers; expectations regarding customer relationships and counterparty risk; the anticipated effect of terminal services on Source’s business; expectations regarding funding for future working capital and capital expenditures; Source’s planned cash outflows relating to lease commitments and financial liabilities; the ability to secure future funding; expectations on Source’s ability to meet their capital needs; expectations regarding fluctuations in foreign currency; expectations regarding the severity and outcome of legal claims and proceedings; expectations regarding the impact of climate change; risks associated with information systems and cyber security; and operational risks.
By their nature, forward-looking statements involve numerous current assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Source to differ materially from those anticipated by Source and described in the forward-looking statements.
With respect to the forward-looking statements contained in this press release assumptions have been made regarding, among other things: proppant market prices; future oil, natural gas and natural gas liquids prices; future global economic and financial conditions; future commodity prices, demand for oil and gas and the product mix of such demand; levels of activity in the oil and gas industry in the areas in which Source operates; the continued availability of timely and safe transportation for Source’s products, including without limitation, Source’s rail car fleet and the accessibility of additional transportation by rail and truck; the maintenance of Source’s key customers and the financial strength of its key customers; the maintenance of Source’s significant contracts or their replacement with new contracts on substantially similar terms and that contractual counterparties will comply with current contractual terms; operating costs; that the regulatory environment in which Source operates will be maintained in the manner currently anticipated by Source; future exchange and interest rates; geological and engineering estimates in respect of Source’s resources; the recoverability of Source’s resources; the accuracy and veracity of information and projections sourced from third parties respecting, among other things, future industry conditions and product demand; demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and procedures, particularly with respect to the use of proppants; Source’s ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which Source conducts its business and any other jurisdictions in which Source may conduct its business in the future; future capital expenditures to be made by Source; future sources of funding for Source’s capital program; Source’s future debt levels; the impact of competition on Source; and Source’s ability to obtain financing on acceptable terms.
A number of factors, risks and uncertainties could cause results to differ materially from those anticipated and described herein including, among others: the effects of competition and pricing pressures; risks inherent in key customer dependence; effects of fluctuations in the price of proppants; risks related to indebtedness and liquidity, including Source’s leverage, restrictive covenants in Source’s debt instruments and Source’s capital requirements; risks related to interest rate fluctuations and foreign exchange rate fluctuations; changes in general economic, financial, market and business conditions in the markets in which Source operates; changes in the technologies used to drill for and produce oil and natural gas; Source’s ability to obtain, maintain and renew required permits, licenses and approvals from regulatory authorities; the stringent requirements of and potential changes to applicable legislation, regulations and standards; the ability of Source to comply with unexpected costs of government regulations; liabilities resulting from Source’s operations; the results of litigation or regulatory proceedings that may be brought against Source; the ability of Source to successfully bid on new contracts and the loss of significant contracts; uninsured and underinsured losses; risks related to the transportation of Source’s products, including potential rail line interruptions or a reduction in rail car availability; the geographic and customer concentration of Source; the impact of climate change risk; the ability of Source to retain and attract qualified management and staff in the markets in which Source operates; labour disputes and work stoppages and risks related to employee health and safety; general risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and borrowing trends; limited, unfavourable, or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; sand processing problems; implementation of recently issued accounting standards; the use and suitability of Source’s accounting estimates and judgments; and the impact of information systems and cyber security breaches.
Although Source has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will materialize or prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. Readers should not place undue reliance on forward-looking statements. These statements speak only as of the date of this press release. Except as may be required by law, Source expressly disclaims any intention or obligation to revise or update any forward-looking statements or information whether as a result of new information, future events or otherwise.
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